Russian Ruble: Soon to Be Backed by Gold?

The Russian government has been pursuing an increase of its gold reserves for some time now. Considering the continuing sanctions that get to the Ruble, Vladimir Putin might make a spectacular move with the aid of his Central Bank

MORE: Business

This article originally appearded at KOPP Online. Translated for RI by Alexander Samarkin


Russia is struggling with a number of liabilities these days. The price for oil, Russia's most important export good, has reached historical lows. During the previous weeks the Ruble could only recover slightly from its devastating slump against the Dollar, that has been lasting for a year now.

<figcaption>A gold-backed ruble would be the nail in the coffin of the petro dollar</figcaption>
A gold-backed ruble would be the nail in the coffin of the petro dollar

Compared to February last year, the Russian currency now has about 40% less purchase power than the Greenback. Russia and USA are in the middle of a currency war that threatens to become an armed conflict. Not even during the cold war has the „diplomatic“ talk between USA and Russia been that harsh.

Even from elitist circles come ominous warnings of an acute geopolitical danger. The continuing sanctions against Russia in the process of the Ukraine-crisis hurt the Russian economy additionally. The Russian government has to take radical measures to enhance the attractiveness of the Ruble for investors. In this context a gold backing seems more probable than ever.

As good as gold

To understand why the Ruble might face a long-term revaluation one has to take a look at the past of the USA. Since the Bretton Woods Agreement in 1944, the gold backed American Dollar prevailed as world reserve currency. 

Many market observers today forget about the fact, that since 1971 the US Dollar is a pure fiat currency that can be created arbitrarily by the Fed out of thin air. At that time president Nixon closed the „gold window“ and ended Bretton Woods. Therefore all currencies pegged to the Dollar automatically became pure paper currencies as well. Ever since we all are participants in a gigantic experiment – the worldwide paper currency standard without physical backing.

A golden sign

Russia could set an example now. For generations, gold has been the anchor for stability of a currency. During the past decades this fact was totally forgotten. Not till the financial crisis in 2008 Russia, China and other BRICS countries started buying the „barbaric relic“ as John Maynard Keynes called it. According to the World Gold Council Russia's gold reserves as of February 2015 amount to approximately 1208 tonnes, an increase of  173 tonnes in 2014.

Amazingly the Russian Rossiya Bank made a mark in April last year and placed an impressive gold coloured Ruble in front of its head office, in order to point out the stability of the Russian currency due to its underlying gold reserves. First signs for a change in central bank politics towards a gold backing?

The power structure is shaking

Russia takes up a big part of the Eurasian continent, which is the geostrategically most important on the globe. American policy advisers like Zbigniev Brzezinski and Henry Kissinger are aware of that and take advantage of the weakness of the Ruble. It can be manipulated through western interference, which prevents a resurrection of Russia. Mayer Amschel Rothschild, banker and co-founder of the Rothschild Dynasty, once said: "Give me control of a nation's money and I care not who makes the laws"

A gold backing of the Ruble could make Russia more robust against hostile interference and set the course for a new Eurasian Great Power. However it can't be ruled out that such a gold backing might make Russia prone to external attacks. During a stage of economic recession the Ruble might drag the gold price down with it. Hence the move toward a Gold Ruble should be regarded as long-term investment of Russia into her monetary future. 

Gold plated gas?

The Russian Great Power is mainly based on an abundance of resources. However nearly all oil deals worldwide are being settled in American Dollars, hence the name Petro-Dollar. The selling of the Russian energy resources gas and oil in a gold backed Russian currency would tantamount to an assault on that system. Because in the long run the Ruble would be very attractive compared to all other currencies that keep constantly inflating.

Simultaneously, with such a move Russia could expand her up to now accumulated gold reserves enormously. This would be the case if Russia kept exporting more than importing. Because foreign countries would run short on Rubles and new Rubles would only be issued for gold. The downside is that investors might exchange their Ruble stocks for physical gold and therefore plunder the Russian gold reserves. The only precedent is the collapse of the London Gold Pool, that went through a similar scenario in 1968. But this could only happen if Russia had a sustainable trade gap.

A weakening of the Dollar and the billing of oil reserves in a gold backed Ruble are also not necessarily beneficial to some trade partners. Neither will the EU show interest in depleting her own gold reserves for purchase of energy resources, nor will China be eager to condone a devaluation of the Dollar and thus relinquish her own Dollar stocks to impairment. China, however, would have the option to trade Russian oil and gas directly for goods like machines and technology and that way avoid the Gold Ruble in bilateral trade. The EU countries would be barred from this option due to the current sanctions.

Derivatives as fire accelerates

However, the financial apocalypse is lurking from a different side. Entire nations and financial systems are linked by derivatives, that amount to a total value of  more than 700 trillion US-Dollars by now. These derived financial instruments could plunge the global financial system into the abyss and drag entire national economies with them.

Extremely fluctuating exchange rates of the Ruble to other currencies within minutes, as can set in with a sudden gold backing, might trigger a derivatives crash.

An initial foretaste to such a scenario was given at the beginning of this year by the decision of the Swiss Central Bank, to unpeg the Franc from the Euro. However, Russia could peg the Ruble to the gold price at the current exchange rate, which would have little market related consequences and leave the derivatives market unimpressed.

Conclusion

A sudden gold backing of the Ruble would be sensational and would make it into history books of future generations without fail. However, the consequences are politically highly explosive. The USA are unlikely to accept the decline of their currency. To sell energy reserves in the domestic currency is not a new idea of Putin, however, up to now unrealizable. In the long run, the Ruble could become a haven of stability. Moreover it is reasonable to assume that in the medium term other central banks – at least from economically strong and solid countries like Switzerland, Norway or Singapore – might follow the Russian example.

Further gold purchases by the Russian central bank should be under scrutiny. The reaction of the financial world to the Swiss Central Bank's decision was already a puzzled outcry, horrified silence could follow in case of a positive decision of the Kremlin in favor of gold backing. Already the Romans were aware of the impact of gold when they stated: »Auro loquente omnis oratio inanis est.« - »When gold talks, the world is silent.«

 

 

MORE: Business

Our commenting rules: You can say pretty much anything except the F word. If you are abusive, obscene, or a paid troll, we will ban you. Full statement from the Editor, Charles Bausman.